Full file at http://testbankcart.eu/Test-Bank-for-Intermediate-FinancialManagement-11th-Edition-by-Brigham
CHAPTER 1
AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL
ENVIRONMENT
Please see the preface for information on the AACSB letter indicators (F, M,
etc.) on the subject lines.
True/False
Easy:
1.
(1.2) Firm organization
F M
Answer: b
EASY
The form of organization for a business is not an important issue, as
this decision has very little effect on the income and wealth of the
firm's owners.
a.
b.
2.
(1.2) Firm organization
F M
Answer: b
EASY
The major advantage of a regular partnership or a corporation as a form
of business organization is the fact that both offer their owners
limited liability, whereas proprietorships do not.
a.
b.
3.
True
False
(1.2) Partnership
F M
Answer: a
EASY
There are three primary disadvantages of a regular partnership: (1)
unlimited liability, (2) limited life of the organization, and (3)
difficulty of transferring ownership. These combine to make it
difficult for partnerships to attract large amounts of capital and thus
to grow to a very large size.
a.
b.
4.
True
False
True
False
(1.2) Proprietorship
F M
Answer: a
EASY
Two disadvantages of a proprietorship are (1) the relative difficulty of
raising new capital and (2) the owner's unlimited personal liability for
the business' debts.
a.
True
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to a publicly accessible website, in whole or in part.
b.
5.
(1.2) Limited liability
F M
Answer: a EASY
One key value of limited liability is that it lowers owners' risks and
thereby enhances a firm's value.
a.
b.
6.
True
False
(1.8) Financial markets
F H
Answer: a EASY
Recently, Hale Corporation announced the sale of 2.5 million newly
issued shares of its stock at a price of $21 per share. Hale sold the
stock to an investment banker, who in turn sold it to individual and
institutional investors. This is a primary market transaction.
a.
b.
10.
True
False
(1.8) Financial markets
F H
Answer: b EASY
If an individual investor buys or sells a currently outstanding stock
through a broker, this is a primary market transaction.
a.
b.
9.
True
False
(1.4) Financial intermediaries
F M
Answer: a EASY
If Firm A's business is to obtain savings from individuals and then
invest them in financial assets issued by other firms or individuals,
Firm A is a financial intermediary.
a.
b.
8.
True
False
(1.3) Value maximization
F M
Answer: b EASY
If a firm's goal is to maximize its earnings per share, this is the best
way to maximize the price of the common stock and thus shareholders'
wealth.
a.
b.
7.
False
True
False
(1.11) Stock market transactions
F H
Answer: a EASY
One of the functions of NYSE specialists is to facilitate trading by
keeping an inventory of shares of the stocks in which they specialize,
buying when investors want to sell and selling when they want to buy.
They change the bid and ask prices of the securities so as to keep
supply and demand in balance.
a.
True
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to a publicly accessible website, in whole or in part.
Page 2
True/False
Chapter 1: Overview
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b.
False
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Medium:
11.
(1.2) Partnership
F M
Answer: b
MEDIUM
The disadvantages associated with a proprietorship are similar to those
under a partnership. One exception relates to the more formal nature of
the partnership agreement and the commitment of all partners' personal
assets. As a result, partnerships do not have difficulty raising large
amounts of capital.
a.
b.
12.
True
False
(1.2) Proprietorship
F M
Answer: a
MEDIUM
The facts that a proprietorship, as a business, pays no corporate income
tax, and that it is easily and inexpensively formed, are two key
advantages to that form of business.
a.
b.
True
False
Multiple Choice: Conceptual
Easy:
13.
(1.2) Firm organization
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
Answer: d
EASY
One of the disadvantages of incorporating a business is that the
owners then become subject to liabilities in the event the firm
goes bankrupt.
Sole proprietorships are subject to more regulations than
corporations.
In any type of partnership, every partner has the same rights,
privileges, and liability exposure as every other partner.
Sole proprietorships and partnerships generally have a tax
advantage over many corporations, especially large ones.
Corporations of all types are subject to the corporate income tax.
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to a publicly accessible website, in whole or in part.
Page 4
Conceptual Questions
Chapter 1: Overview
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(1.2) Firm organization
C M
Answer: a EASY
14. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
15.
(1.2) Firm organization
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
16.
One of the disadvantages of a sole proprietorship is that the
proprietor is exposed to unlimited liability.
It is generally easier to transfer one’s ownership interest in a
partnership than in a corporation.
One of the advantages of the corporate form of organization is that
it avoids double taxation.
One of the advantages of a corporation from a social standpoint is
that every stockholder has equal voting rights, i.e., “one person,
one vote.”
Corporations of all types are subject to the corporate income tax.
Answer: d
EASY
It is generally more expensive to form a proprietorship than a
corporation because, with a proprietorship, extensive legal
documents are required.
Corporations face fewer regulations than sole proprietorships.
One disadvantage of operating a business as a sole proprietorship
is that the firm is subject to double taxation, at both the firm
level and the owner level.
One advantage of forming a corporation is that equity investors are
usually exposed to less liability than in a regular partnership.
If a regular partnership goes bankrupt, each partner is exposed to
liabilities only up to the amount of his or her investment in the
business.
(1.2) Firm organization
C M
Answer: c EASY
Cheers Inc. operates as a partnership. Now the partners have decided to
convert the business into a regular corporation. Which of the following
statements is CORRECT?
a.
b.
c.
d.
e.
Assuming Cheers is profitable, less of its income will be subject
to federal income taxes.
Cheers will now be subject to fewer regulations.
Cheers’ shareholders (the ex-partners) will now be exposed to less
liability.
Cheers’ investors will be exposed to less liability, but they will
find it more difficult to transfer their ownership.
Cheers will find it more difficult to raise additional capital.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 5
(1.2) Firm organization
C M
Which of the following statements is CORRECT?
17.
a.
b.
c.
d.
e.
18.
EASY
It is usually easier to transfer ownership in a corporation than it
is to transfer ownership in a sole proprietorship.
Corporate shareholders are exposed to unlimited liability.
Corporations generally face fewer regulations than sole
proprietorships.
Corporate shareholders are exposed to unlimited liability, and this
factor may be compounded by the tax disadvantages of incorporation.
Shareholders in a regular corporation (not an S corporation) pay
higher taxes than owners of an otherwise identical proprietorship.
(1.2) Corporate form of organization
C M
Answer: c EASY
Which of the following could explain why a business might choose to
operate as a corporation rather than as a sole proprietorship or a
partnership?
a.
b.
c.
d.
e.
19.
Answer: a
Corporations generally find it relatively difficult to raise large
amounts of capital.
Less of a corporation’s income is generally subjected to taxes than
would be true if the firm were a partnership.
Corporate shareholders escape liability for the firm's debts, but
this factor may be offset by the tax disadvantages of the corporate
form of organization.
Corporate investors are exposed to unlimited liability.
Corporations generally face relatively few regulations.
(1.4) Financial transactions
C H
Answer: c EASY
You recently sold 100 shares of your new company, XYZ Corporation, to
your brother at a family reunion. At the reunion your brother gave you
a check for the stock and you gave your brother the stock certificates.
Which of the following statements best describes this transaction?
a.
b.
c.
d.
e.
This
This
This
This
This
is
is
is
is
is
an
an
an
an
an
example
example
example
example
example
of
of
of
of
of
an exchange of physical assets.
a primary market transaction.
a direct transfer of capital.
a money market transaction.
a derivatives market transaction
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to a publicly accessible website, in whole or in part.
Page 6
Conceptual Questions
Chapter 1: Overview
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(1.6) Interest rates
C H
Answer: a EASY
20. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
21.
(1.7) Hedge funds
C O
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
22.
If expected inflation increases, interest rates are likely to
increase.
If individuals in general increase the percentage of their income
that they save, interest rates are likely to increase.
If companies have fewer good investment opportunities, interest
rates are likely to increase.
Interest rates on all debt securities tend to rise during
recessions because recessions increase the possibility of
bankruptcy, hence the riskiness of all debt securities.
Interest rates on long-term bonds are more volatile than rates on
short-term debt securities like T-bills.
EASY
In Europe and Asia hedge funds are legal, but they are not
permitted to operate in the United States.
Hedge funds have more in common with commercial banks than with any
other type of financial institution.
Hedge funds have more in common with investment banks than with any
other type of financial institution.
In the United States hedge funds are legal, but in Europe and Asia
they are not permitted to operate.
The justification for the "light" regulation of hedge funds is that
only “sophisticated” investors with high net worths and high
incomes are permitted to invest in these funds, and such investors
supposedly can do the necessary “due diligence” on their own rather
than have it done by the SEC or some other regulator.
(1.8) Money markets
Money markets are markets for
a.
b.
c.
d.
e.
Answer: e
C O
Answer: d
EASY
Foreign stocks.
Consumer automobile loans.
U.S. stocks.
Short-term debt securities.
Long-term bonds.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 7
23.
(1.8) Financial markets
C H
Which of the following is a primary market transaction?
a.
b.
c.
d.
e.
24.
b.
c.
d.
e.
25.
EASY
You sell 200 shares of Johnson & Johnson stock on the NYSE through
your broker.
Johnson & Johnson issues 2,000,000 shares of new stock and sells
them to the public through an investment banker.
You buy 200 shares of Johnson & Johnson stock from your younger
brother. You just give him cash and he gives you the stock--the
trade is not made through a broker.
One financial institution buys 200,000 shares of Johnson & Johnson
stock from another institution. An investment banker arranges the
transaction.
You invest $10,000 in a mutual fund, which then uses the money to
buy $10,000 of Johnson & Johnson shares on the NYSE.
(1.8) Financial markets
C H
Which of the following statements is CORRECT?
a.
Answer: b
Answer: e
EASY
If Apple issues additional shares of common stock through an
investment banker, this would be a secondary market transaction.
If you purchased 100 shares of Apple stock from your sister-in-law,
this would be an example of a primary market transaction.
The IPO market is a subset of the secondary market.
Only institutions, and not individuals, can participate in
derivatives market transactions.
As they are generally defined, money market transactions involve
debt securities with maturities of less than one year.
(1.8) Financial markets
C H
Answer: c EASY
You recently sold 200 shares of Apple stock to your brother. The
transfer was made through a broker, and the trade occurred on the NYSE.
This is an example of:
a.
b.
c.
d.
e.
A futures market transaction.
A primary market transaction.
A secondary market transaction.
A money market transaction.
An over-the-counter market transaction.
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to a publicly accessible website, in whole or in part.
Page 8
Conceptual Questions
Chapter 1: Overview
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(Comp: 1.7-1.9) Financial markets
C H
Answer: a EASY
26. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
27.
(Comp: 1.7-1.9) Financial markets
C H
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
28.
The New York Stock Exchange is an auction market with a physical
location.
Capital market transactions involve only the purchase and sale of
equity securities, i.e., common stocks.
If an investor sells shares of stock through a broker, then this
would be a primary market transaction.
Consumer automobile loans are evidenced by legal documents called
"promissory notes," and these individual notes are traded in the
money market.
While the distinctions are blurring as investment banks are today
buying commercial banks, and vice versa, investment banks generally
specialize in lending money, whereas commercial banks generally
help companies raise capital from other parties.
b.
c.
d.
e.
EASY
Capital market instruments include both long-term debt and common
stocks.
An example of a primary market transaction would be your uncle
transferring 100 shares of Wal-Mart stock to you as a birthday
gift.
The NYSE does not exist as a physical location; rather, it
represents a loose collection of dealers who trade stocks
electronically.
If your uncle in New York sold 100 shares of Microsoft through his
broker to an investor in Los Angeles, this would be a primary
market transaction.
While the two frequently perform similar functions, investment
banks generally specialize in lending money, whereas commercial
banks generally help companies raise large blocks of capital from
investors.
(Comp: 1.7-1.9) Financial markets
C H
Which of the following statements is CORRECT?
a.
Answer: a
Answer: e
EASY
While the distinctions are blurring, investment banks generally
specialize in lending money, whereas commercial banks generally
help companies raise capital from other parties.
A security whose value is derived from the price of some other
“underlying” asset is called a liquid security.
Money market mutual funds usually invest most of their money in a
well-diversified portfolio of liquid common stocks.
Money markets are markets for common stocks and long-term debt.
The NYSE operates as an auction market, whereas the Nasdaq is a
dealer market.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 9
Medium:
29.
(1.2) Corporate form of organization
C M
Answer: a
MEDIUM
One drawback of switching from a partnership to the corporate form of
organization is the following:
a.
b.
c.
d.
e.
30.
It subjects the firm to additional regulations.
It cannot affect the amount of the firm's operating income that
goes to taxes.
It makes it more difficult for the firm to raise additional
capital.
It makes the firm’s investors subject to greater potential personal
liabilities.
It makes it more difficult for the firm’s investors to transfer
their ownership interests.
(1.2) Corporate form of organization
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
Answer: c
MEDIUM
The main method of transferring ownership interest in a corporation
is by means of a hostile takeover.
Two key advantages of the corporate form over other forms of
business organization are unlimited liability and limited life.
A corporation is a legal entity that is generally created by a
state; its life and existence is separate from the lives of its
individual owners and managers.
Limited liability of its stockholders is an advantage of the
corporate form of organization, but corporations have more trouble
raising money in financial markets because of the complexity of
this form of organization.
Although its stockholders are insulated by limited legal liability,
the corporation’s legal status does not protect the firm’s managers
in the same way; i.e., bondholders can sue its managers if the firm
defaults on its debt, even if the default is the result of poor
economic conditions.
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Page 10
Conceptual Questions
Chapter 1: Overview
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(1.2) Partnership form of organization
C M
Answer: b
MEDIUM
31. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
32.
In a regular partnership, liability for other partners’ misdeeds is
limited to the amount of a particular partner’s investment in the
business.
Attracting large amounts of capital is more difficult for
partnerships than for corporations because of such factors as
unlimited liability, the need to reorganize when a partner dies,
and the illiquidity (difficulty buying and selling) of partnership
interests.
A slow-growth company, with little need for new capital, would be
more likely to organize as a corporation than would a faster
growing company.
The limited partners in a limited partnership have voting control,
while the general partner has operating control over the business.
Also, the limited partners are individually responsible, on a pro
rata basis, for the firm’s debts in the event of bankruptcy.
A major disadvantage of all partnerships compared to all
corporations is the fact that federal income taxes must be paid by
the partners rather than by the firm itself.
(1.2) Partnership form of organization
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
Answer: d
MEDIUM
Corporations are at a disadvantage relative to partnerships because
they have to file more reports to state and federal agencies,
including the Securities and Exchange Administration, even if they
are not publicly owned.
In a regular partnership, liability for the firm's debts is limited
to the amount a particular partner has invested in the business.
A fast-growth company would be more likely to set up as a
partnership for its business organization than would a slow-growth
company.
Partnerships have difficulty attracting capital in part because of
their unlimited liability, the lack of impermanence of the
organization, and difficulty in transferring ownership.
A major disadvantage of a partnership relative to a corporation as
a form of business organization is the high cost and practical
difficulty of its formation.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 11
33.
(1.2) Firm organization
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
34.
Answer: c
MEDIUM
Most businesses (by number and total dollar sales) are organized as
partnerships or proprietorships because it is easier to set up and
operate in one of these forms rather than as a corporation.
However, if the business gets very large, it becomes advantageous
to convert to a corporation, mainly because corporations have
important tax advantages over proprietorships and partnerships.
Due to limited liability, unlimited lives, and ease of ownership
transfer, the vast majority of U.S. businesses (in terms of number
of businesses) are organized as corporations.
Most business (measured by dollar sales) is conducted by
corporations in spite of large corporations’ often less favorable
tax treatment, due to legal considerations related to ownership
transfers and limited liability.
Large corporations are taxed more favorably than sole
proprietorships.
Corporate stockholders are exposed to unlimited liability.
(1.2) Firm organization
C M
Answer: b
MEDIUM
Jane Doe, who has substantial personal wealth and income, is considering
the possibility of starting a new business in the chemical waste
management field. She will be the sole owner, and she has enough funds
to finance the operation. The business will have a relatively high
degree of risk, and it is expected that the firm will incur losses for
the first few years. However, the prospects for growth and positive
future income look good, and Jane plans to have the firm pay out all of
its income as dividends to her once it is well established. Which of the
legal forms of business organization would probably best suit her needs?
a.
b.
c.
d.
e.
Proprietorship, because of ease of entry.
S corporation, to gain some tax advantages and also to obtain
limited liability.
Partnership, but only if she needs additional capital.
Regular corporation, because of the limited liability.
In this situation, the various forms of organization seem equally
desirable.
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Conceptual Questions
Chapter 1: Overview
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(1.2) Corporate charter and bylaws
C M
Answer: e
MEDIUM
35. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
36.
The corporate bylaws are a standard set of rules established by the
state of incorporation. These rules are identical for all
corporations in the state, and their purpose is to ensure that the
firm’s managers run the firm in accordance with state laws.
The corporate charter is a standard document prescribed by the
state of incorporation, and its purpose is to ensure that the
firm’s managers run the firm in accordance with state laws.
Procedures for electing corporate directors are contained in
bylaws, while the declaration of the activities that the firm will
pursue and the number of directors are included in the corporate
charter.
Companies must establish a home office, or domicile, in a
particular state, and that state must be the one in which most of
their business (sales, manufacturing, and so forth) is conducted.
Attorney fees are generally involved when a company develops its
charter and bylaws, but since these documents are voluntary, a new
corporation can avoid these costs by deciding not to have either a
charter or bylaws.
The corporate charter is concerned with things like what business
the company will engage in, whereas the bylaws are concerned with
things like procedures for electing the board of directors.
(1.3) Business ethics
B M
Answer: c
MEDIUM
With which of the following statements would most people in business
agree?
a.
b.
c.
d.
e.
The short-run profits of a corporation will almost always increase
if the firm takes actions the government has determined are in the
nation’s best interests.
Government agencies and firms almost always agree with one another
regarding the restrictions that should be placed on hiring and
firing employees.
Although people’s moral characters are probably developed before
they get into a business school, it is still useful for business
schools to cover ethics, including giving students an idea about
the adverse consequences of unethical behavior to themselves, their
firms, and the nation.
Developing a formal set of rules defining ethical and unethical
behavior is not useful for a large corporation. Such rules
generally can't be applied in many specific instances, so it is
better to deal with ethical issues on a case-by-case basis.
Because of the courage it takes to blow the whistle, “whistle
blowers” are generally promoted more rapidly than other employees.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 13
37.
(1.3) Goal of firm
C M
Answer: a
MEDIUM
The primary operating goal of a publicly-owned firm interested in
serving its stockholders should be to
a.
b.
c.
d.
e.
38.
(1.3) Corporate goals and control
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
39.
Maximize the stock price per share over the long run, which is the
stock’s intrinsic value.
Maximize the firm's expected EPS.
Minimize the chances of losses.
Maximize the firm's expected total income.
Maximize the stock price on a specific target date.
Answer: d
MEDIUM
The financial manager’s proper goal should be to attempt to
maximize the firm’s expected cash flows, since that will add the
most to the individual shareholders’ wealth.
The financial manager should seek that combination of assets,
liabilities, and capital that will generate the largest expected
projected after-tax income over the relevant time horizon,
generally the coming year.
The riskiness inherent in a firm’s earnings per share (EPS) depends
on the characteristics of the projects the firm selects, and thus
on the firm’s assets. However, EPS is not affected by the manner
in which those assets are financed.
Potential agency problems can arise between managers and
stockholders, because managers hired as agents to act on behalf of
the owners may instead make decisions favorable to themselves
rather than the stockholders.
Large, publicly owned firms like IBM and GE are controlled by their
management teams. Ownership is generally widely dispersed; hence
managers have great freedom in how they run the firm. Managers may
operate in stockholders’ best interests, but they also may operate
in their own personal best interests. As long as they stay within
the law, there is no way to either force or motivate managers to
act in the stockholders’ best interests.
(1.6) Security prices and interest rates C H
Answer: e
MEDIUM
Suppose the U.S. Treasury announces plans to issue $50 billion of new
bonds. Assuming the announcement was not expected, what effect, other
things held constant, would that have on bond prices and interest rates?
a.
b.
c.
d.
e.
Prices and interest rates would both rise.
Prices would rise and interest rates would decline.
Prices and interest rates would both decline.
There would be no changes in either prices or interest rates.
Prices would decline and interest rates would rise.
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to a publicly accessible website, in whole or in part.
Page 14
Conceptual Questions
Chapter 1: Overview
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(1.6) Interest rates
C H
Answer: d
MEDIUM
40. Which of the following would be most likely to lead to higher interest
rates on all debt securities in the economy?
a.
b.
c.
d.
e.
41.
(1.6) Interest rates
C H
Answer: e
MEDIUM
Which of the following factors would be most likely to lead to an
increase in interest rates in the economy?
a.
b.
c.
d.
e.
42.
Households start saving a larger percentage of their income.
The economy moves from a boom to a recession.
The level of inflation begins to decline.
Corporations step up their expansion plans and thus increase their
demand for capital.
The Federal Reserve uses monetary policy in an attempt to stimulate
the economy.
Households reduce their consumption and increase their savings.
The Federal Reserve decides to try to stimulate the economy.
There is a decrease in expected inflation.
The economy falls into a recession.
Most businesses decide to modernize and expand their manufacturing
capacity, and to install new equipment to reduce labor costs.
(Comp: 1.8,1.9,1.11) Financial transactions
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
C H
Answer: d
MEDIUM
If General Electric were to issue new stock this year it would be
considered a secondary market transaction since the company already
has stock outstanding.
Capital market transactions only include preferred stock and common
stock transactions.
The distinguishing feature between spot markets versus futures
markets transactions is the maturity of the investments. That is,
spot market transactions involve securities that have maturities of
less than one year, whereas futures markets transactions involve
securities with maturities greater than one year.
Both Nasdaq "dealers" and NYSE “specialists” hold inventories of
stocks.
An electronic communications network (ECN) is a physical location
exchange.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 15
43.
(Comp: 1.2,1.3) Miscellaneous concepts
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
44.
b.
c.
d.
e.
MEDIUM
Corporations generally are subject to more favorable tax treatment
and fewer regulations than partnerships and sole proprietorships,
which is why corporations do most of the business in the United
States.
Managers who face the threat of hostile takeovers are less likely
to pursue policies that maximize shareholder value than are
managers who do not face the threat of hostile takeovers.
One advantage of the corporate form of organization is that
liability of the owners of the firm is limited to their investment
in the firm.
Because of their simplified organization, it is easier for sole
proprietorships and partnerships to raise large amounts of outside
capital than it is for corporations.
Bond covenants are an effective way to resolve conflicts between
shareholders and managers.
(Comp: 1.2,1.3) Miscellaneous concepts
C M
Which of the following statements is CORRECT?
a.
Answer: c
Answer: e
MEDIUM
A good goal for a firm’s management is maximization of expected
EPS.
Most business in the U.S. is conducted by corporations, and
corporations’ popularity results primarily from their favorable tax
treatment.
Because most stock ownership is concentrated in the hands of a
relatively small segment of society, firms' actions to maximize
their stock prices have little benefit to society.
Corporations and partnerships have an advantage over
proprietorships because a sole proprietor is exposed to unlimited
liability, but the liability of all investors in the other types of
businesses is more limited.
The potential exists for agency conflicts between stockholders and
managers.
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Page 16
Conceptual Questions
Chapter 1: Overview
Full file at http://testbankcart.eu/Test-Bank-for-Intermediate-FinancialManagement-11th-Edition-by-Brigham
45.
(Comp: 1.2,1.3) Miscellaneous concepts
C M
Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
Answer: d
MEDIUM
One disadvantage of operating as a corporation rather than as a
partnership is that corporate shareholders are exposed to more
personal liability than partners.
There is no good reason to expect a firm's bondholders and
stockholders to react differently to the types of new asset
investments a firm makes.
Bondholders are generally more willing than stockholders to have
managers invest in risky projects with high potential returns as
opposed to safer projects with lower expected returns.
Stockholders are generally more willing than bondholders to have
managers invest in risky projects with high potential returns as
opposed to safer projects with lower expected returns.
Relative to sole proprietorships, corporations generally face fewer
regulations, which makes raising capital easier for corporations.
Medium/Hard:
46.
(1.8) Ownership and going public
C M
Answer: b
Which of the following statements is NOT CORRECT?
a.
b.
c.
d.
e.
MEDIUM/HARD
When a corporation’s shares are owned by a few individuals and are
not traded on public markets, we say that the firm is “closely, or
privately, held."
“Going public” establishes a firm's true intrinsic value, and it
also insures that a highly liquid market will always exist for the
firm’s shares.
When stock in a closely held corporation is offered to the public
for the first time, the transaction is called “going public,” and
the market for such stock is called the new issue market.
Publicly owned companies have shares owned by investors who are not
associated with management, and public companies must register with
and report to a regulatory agency such as the SEC.
It is possible for a firm to go public and yet not raise any
additional new capital at the time.
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to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Conceptual Questions
Page 17
CHAPTER 1
ANSWERS AND SOLUTIONS
1.
(1.2) Firm organization
F M
Answer: b
EASY
2.
(1.2) Firm organization
F M
Answer: b
EASY
3.
(1.2) Partnership
F M
Answer: a
EASY
4.
(1.2) Proprietorship
F M
Answer a
EASY
5.
(1.2) Limited liability
F M
Answer: a
EASY
6.
(1.3) Value maximization
F M
Answer: b
EASY
7.
(1.4) Financial intermediaries
F M
Answer a
EASY
8.
(1.8) Financial markets
F H
Answer: b
EASY
9.
(1.8) Financial markets
F H
Answer: a
EASY
10.
(1.11) Stock market transactions
F H
Answer: a
EASY
11.
(1.2) Partnership
F M
Answer: b
MEDIUM
12.
(1.2) Proprietorship
F M
Answer: a
MEDIUM
13.
(1.2) Firm organization
C M
Answer: d
EASY
Sole proprietorships and partnerships pay personal income tax, but they avoid the corporate income tax.
Small corporations that meet certain requirements can elect to be classified as S Corporations, and then the
business is taxed as a partnership.
14.
(1.2) Firm organization
C M
Answer: a
EASY
15.
(1.2) Firm organization
C M
Answer: d
EASY
Corporations have limited liability; however, they face more regulations than the other forms of
organization.
16.
(1.2) Firm organization
C M
Answer: c
EASY
17.
(1.2) Firm organization
C M
Answer: a
EASY
If ownership in a proprietorship or partnership is transferred, the basic documents under which the firm
operates must be rewritten, whereas for a corporation the seller simply sells shares to a buyer, and the
corporation records the transfer on its books.
18.
(1.2) Corporate form of organization C M
Answer: c
EASY
19.
(1.4) Financial transactions
Answer: c
EASY
C H
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to a publicly accessible website, in whole or in part.
Page 18
Answers
Chapter 1: Overview
Full file at http://testbankcart.eu/Test-Bank-for-Intermediate-FinancialManagement-11th-Edition-by-Brigham
20.
(1.6) Interest rates
21.
(1.7) Hedge funds
22.
23.
C H
Answer: a
EASY
C O
Answer: e
EASY
(1.8) Money markets
C O
Answer: d
EASY
(1.8) Financial markets
C H
Answer: b
EASY
Statement b is a primary market transaction, since the money and the security pass directly between the
issuing firm and the investor.
24.
(1.8) Financial markets
C H
Answer: e
EASY
25.
(1.8) Financial markets
C H
Answer: c
EASY
It is a secondary market transaction because the stock is transferred from one investor to another.
26.
(Comp: 1.7-1.9) Financial markets
C H
Answer: a
EASY
27.
(Comp: 1.7-1.9) Financial markets
C H
Answer: a
EASY
28.
(Comp: 1.7-1.9)
C H
Answer: e
EASY
29.
(1.2) Corporate form of organization C M
Answer: a
MEDIUM
30.
(1.2) Corporate form of organization C M
Answer: c
MEDIUM
31.
(1.2) Partnership form of organization C M
Answer: b
MEDIUM
32.
(1.2) Partnership form of organization C M
Answer: d
MEDIUM
33.
(1.2) Firm organization
C M
Answer: c
MEDIUM
34.
(1.2) Firm organization
C M
Answer: b
MEDIUM
Financial markets
The S corporation would allow her to take early losses as deductions against her other income, hence save
some taxes. Then, when the firm became profitable, she would receive dividends and pay taxes on them,
but the firm itself would avoid corporate taxes and double taxation.
35.
(1.2) Corporate charter and bylaws
C M
Answer: e
MEDIUM
36.
(1.3) Business ethics
B M
Answer: c
MEDIUM
It is important to have a specific set of rules that all employees are expected to follow. This helps constrain
actions, and it is also important to "prove" that the company is trying to do right if some employee does
something wrong.
37.
(1.3) Goal of firm
C M
Answer: a
MEDIUM
38.
(1.3) Corporate goals and control
C M
Answer: d
MEDIUM
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Chapter 1: Overview
Answers
Page 19
39.
(1.5) Security prices and interest rates C H
Answer: e
MEDIUM
40.
(1.6) Interest rates
Answer: d
MEDIUM
41.
(1.6) Interest rates
Answer: e
MEDIUM
C H
C H
An increase in the demand for capital by businesses will increase interest rates in the economy.
42.
(Comp: 1.8,1.9,1.11) Financial transactions C H
Answer: d
MEDIUM
43.
(Comp: 1.2,1.3) Miscellaneous concepts C M
Answer: c
MEDIUM
44.
(Comp: 1.2,1.3) Miscellaneous concepts C M
Answer: e
MEDIUM
45.
(Comp: 1.2,1.3) Miscellaneous concepts C M
Answer: d
MEDIUM
46.
(1.8) Ownership and going public
C M
Answer: b
MEDIUM/HARD
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Page 20
Answers
Chapter 1: Overview